§ 3-605. DISCHARGE OF SECONDARY OBLIGORS.

(a) If a person
entitled to enforce an instrument releases the
obligation of a principal obligor in whole or in part, and another party to
the instrument is a secondary obligor with respect to the obligation of that
principal obligor, the following rules apply:

(1) Any obligations of the principal obligor to the secondary
obligor with respect to any previous payment by the secondary obligor are not
affected. Unless the terms of the release preserve the secondary obligor's recourse,
the principal obligor is discharged, to the extent of the release, from any
other duties to the secondary obligor under this article.

(2) Unless the terms of the release provide that the person
entitled to enforce the instrument retains the right to enforce the instrument
against the secondary obligor, the secondary obligor is discharged to the same
extent as the principal obligor from any unperformed portion of its obligation
on the instrument. If the instrument is a check and the obligation of the secondary
obligor is based on an indorsement of the check, the secondary obligor is discharged
without regard to the language or circumstances of the discharge or other release.

(3) If the secondary obligor is not discharged under paragraph
(2), the secondary obligor is discharged to the extent of the value of the consideration
for the release, and to the extent that the release would otherwise cause the
secondary obligor a loss.

(b) If a person
entitled to enforce an instrument grants a principal
obligor an extension of the time at which one or more payments are due on the
instrument and another party to the instrument is a secondary obligor with
respect to the obligation of that principal obligor, the following rules apply:

(1) Any obligations of the principal obligor to the secondary
obligor with respect to any previous payment by the secondary obligor are not
affected. Unless the terms of the extension preserve the secondary obligor's
recourse, the extension correspondingly extends the time for performance of
any other duties owed to the secondary obligor by the principal obligor under
this article.

(2) The secondary obligor is discharged to the extent
that the extension would otherwise cause the secondary obligor a loss.

(3) To the extent that the secondary obligor is not discharged
under paragraph (2), the secondary obligor may perform its obligations to a
person entitled to enforce the instrument as if the time for payment had not
been extended or, unless the terms of the extension provide that the person
entitled to enforce the instrument retains the right to enforce the instrument
against the secondary obligor as if the time for payment had not been extended,
treat the time for performance of its obligations as having been extended correspondingly.

(c) If a person
entitled to enforce an instrument agrees, with
or without consideration, to a modification of
the obligation of a principal obligor other than a complete or partial release
or an extension of the due date and another party to the instrument is a secondary
obligor with respect to the obligation of that principal obligor, the following
rules apply:

(1) Any obligations of the principal obligor to the secondary
obligor with respect to any previous payment by the secondary obligor are not
affected. The modification correspondingly modifies any other duties owed to
the secondary obligor by the principal obligor under this article.

(2) The secondary obligor is discharged from any unperformed
portion of its obligation to the extent that the modification would otherwise
cause the secondary obligor a loss.

(3) To the extent that the secondary obligor is not discharged
under paragraph (2), the secondary obligor may satisfy its obligation on the
instrument as if the modification had not occurred, or treat its obligation
on the instrument as having been modified correspondingly.

(d) If the obligation of a principal
obligor is secured by an interest in collateral, another party to
the instrument is a secondary obligor with respect to that obligation, and a
person entitled to enforce the instrument impairs the value of the interest
in collateral, the obligation of the secondary obligor is discharged to the
extent of the impairment. The value of an interest in collateral is impaired
to the extent the value of the interest is reduced to an amount less than the
amount of the recourse of the secondary obligor, or the reduction in value of
the interest causes an increase in the amount by which the amount of the recourse
exceeds the value of the interest. For purposes of this subsection, impairing
the value of an interest in collateral includes failure to obtain or maintain
perfection or recordation of the interest in collateral, release of collateral
without substitution of collateral of equal value or equivalent reduction of
the underlying obligation, failure to perform a duty to preserve the value of
collateral owed, under Article 9 or other law, to a debtor or other person secondarily
liable, and failure to comply with applicable law in disposing of or otherwise
enforcing the interest in collateral.

(e) A secondary obligor is not discharged
under subsection (a)(3), (b), (c), or (d) unless the person
entitled to enforce the instrument knows that
the person is a secondary obligor or has notice under Section 3-419(c) that
the instrument was signed for accommodation.

(f) A secondary obligor is not discharged
under this section if the secondary obligor consents to the event or conduct
that is the basis of the discharge, or the instrument or a separate agreement
of the party provides for waiver of discharge under this section specifically
or by general language indicating that parties waive defenses based on suretyship
or impairment of collateral. Unless the circumstances indicate otherwise, consent
by the principal obligor to an act that would lead to a discharge under this
section constitutes consent to that act by the secondary obligor if the secondary
obligor controls the principal obligor or deals with the person entitled to
enforce the instrument on behalf of the principal obligor.

(g) A release or extension preserves
a secondary obligor's recourse if the terms of the release or extension provide
that the person entitled to enforce the instrument retains the right to enforce
the instrument against the secondary obligor; and the recourse of the secondary
obligor continues as though the release or extension had not been granted.

(h) Except as otherwise provided
in subsection (i), a secondary obligor asserting discharge under this section
has the burden of persuasion both with respect to the occurrence of the acts
alleged to harm the secondary obligor and loss or prejudice caused by those
acts.

(i) If the secondary obligor demonstrates
prejudice caused by an impairment of its recourse, and the circumstances of
the case indicate that the amount of loss is not reasonably susceptible of calculation
or requires proof of facts that are not ascertainable, it is presumed that the
act impairing recourse caused a loss or impairment equal to the liability of
the secondary obligor on the instrument. In that event, the burden of persuasion
as to any lesser amount of the loss is on the person entitled to enforce the
instrument.